The investment and distribution of resources

Book 5, Chapter 4

§1.Marshal begins with a simple example of a man building his own house, which he uses to explain how present costs must be less than (expected) future benefits, which are “normalized” (discounted to net present value) via a “sort of compound interest.” I find this beginning quite interesting, since I am now teaching students about cost-benefit analysis and discount rates!

§2. Expanding to the example of a businessman incurring costs now for potential (risk-adjusted) future benefits, Marshall explains how present values are “aggregated” to future values, whereas future values are “discounted” to present values, with the net benefit being calculated at the same point in time.

§3. Competing businessmen will change their mix of inputs in an attempt to find a cheaper means to the same end. Their profit-seeking searches increase efficiency and thus deliver “progress.”

§4. Marshall gives examples of a housewife or house builder changing their mixes of products and inputs, to maximize net benefits. These substitutions are mathematically equalized via “marginal products” that both implicitly understand as if solving equations.

§5. A businessman must recover both “prime” (variable) and “supplementary” (fixed) costs when pricing products for sale.

§6. In the short run, a product’s price need only cover variable costs, but revenues total sales must cover fixed costs in the longer run, if the business is to continue.

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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